Consolidation of credit card debt means that you combine your credit card bills into one single monthly payment. Debt consolidation can be a tempting option when interest rates are low. If you feel overwhelmed by a large amount of credit card debt, you may be interested in debt consolidation.
Types
The different types of debt consolidation are loans, balance transfers, home equity loans and home equity lines of credit. You must be disciplined if you take out a home equity or other type of loan to pay off your credit cards, says Chris Viale, general manager of a nonprofit credit counseling agency in Massachusetts on Bankrate.com. Seventy percent of people who take out loans to pay off credit cards end up with the same or higher debt load within two years. Debt consolidation, says Viale, feeds on the tendencies that may have gotten you in trouble -- namely overspending.
Effects
Consolidating your debt does not necessarily raise or lower your credit score, according to the LendingTree website. Applying for a debt consolidation loan does mean you take on new credit, a fact the credit bureaus note. The credit bureaus, however, look at your entire credit history and note when you pay your outstanding credit card bills. How reliably you pay off the debt consolidation loan is what ultimately raises or lowers your credit score.
Considerations
Closing your old credit card accounts once you take out a consolidation loan is one way to avoid running up a balance on those cards again. But, when you close several credit card accounts, you reduce your available credit. The credit reporting agencies could lower your credit score because of this. Credit reporting agencies use FICO as their credit-scoring model. FICO rewards you for having smaller balances on a variety of cards and penalizes you for having a big balance on one card, according to MSN Money.
Function
LendingTree recommends that if you do want to close your old cards, close newer accounts and leave an older account open. Long-standing accounts establish a long history of credit, which is good for your credit score. Also, request that the credit card companies report that you initiated the closing of the account.
Warning
If part of your debt consolidation involves reducing your payment to your creditor, the credit bureaus will probably lower your credit score, according to Bankrate.com. Even if your creditors agreed to the lower payments, if you don't pay your account according to the original agreement, you can expect a lower credit score as a result.
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